Strategic Business Transformation: The 7 Deadly Sins to Overcome

Overview

When markets transform, they leave some businesses behind while they lift others to new heights. There may be businesses that survive and grow for longer periods than others, but there is a proven single method that can guarantee continuous and permanent success. However, there are common ingredients that if combined into a unique recipe of capabilities can increase the chances of surviving and growing through a market transformation. This book is about understanding and acting upon strategic market transformations before they arrive, by understanding, anticipating, and designing your business using Strategic Business Transformation principles and techniques. It is about withstanding transformation and leading into it when the traditional anchors we hang on to become incompatible with the new market waves.

No one organization displays all the ingredients of success in a carefully compiled recipe, but many show the key characteris­tics. Although we all want to rely on the rational research-based analysis, these methods have proven to have limits when the most-studied companies end up failing after the research is published. However, we can explore measures of capability within each of these businesses. Rationale and researching financial models have their place in transformation, but used exclusively without regard to the nonfinancial side of transformation they would present an incomplete picture. The nonfinancial side is about the customer transformation, the value a business can provide that goes beyond competing on the benefits of the product or service provided; it is the opportunity to find new competencies and build a new identity with a market before it transforms. The softer side of transforma­tion is the more challenging and least understood part of business transformation.

Strategic thinkers tend to be focused, unemotional, and distanced, almost as if this gives them more intellectual insight into the work to be done. These are good traits, but any good trait overemphasized becomes unbalanced.

To anticipate, understand, and be on top of lasting, powerful, and insightful market transformation, we must see it in context of a set of key ingredients for successful transformation. I have framed them into sins to overcome. This book also proposes that the new ways in which business transformation will stick are based on the belief that business transformation will mimic and follow personal transformation. In that context, the principles of strategy transformation must be aligned with the principles of leadership transformation

Leadership is at the heart of everything that is business. Much has been written about the traits of great leaders, and I will draw on this. I will explore a leadership approach that I call Transformational Servant Leadership, which builds on Robert Greenleaf’s pioneering concept of servant leadership.¹ Applied to the field of business transformation, transformations both in business and society start in one person who sees the world differently, who transforms himself or herself to reflect on and prepare for this event and then instigates, provokes, and lives this transformation before others do. This spurs others to do the same. Like Gandhi, Mother Teresa, and other social and political heroes, it all starts with one among us, and not with one above us. Strategic business transformation is not a top-down and trickle-down process. Yet the top-down approach, if modified, can spur lasting transformation in our businesses.

Strategy and Strategic Business Transformation

Strategic business transformation is about developing strategy in anticipation of a dramatic shift in the market, customers, and their desire for products. Since businesses must design their business models to withstand deep change in the markets, what do we use in developing strategy as our northern star to guide us when everything around us could be in transition and we have no anchor? Strategic business transformation is not the design of a strategic plan but the design of the business itself to withstand an anticipated transformation of the markets. It must be done before a strategic plan because the plan assumes that a business and its assets exist in some form. Strategy, transformation, and the elements that strategy stands upon are not the same:

Strategic Business Transformation. The design of your business in transformative times, declaring what you stand for, whom you consider the customers to be, and what you do better than others.

Strategy. The pathway to generating revenue and profits and your view of the landscape for the next five years.

Strategic Variables. The elements in the market and your business that, if changed, would trigger a review of your strategy.

Organizations that have not developed a strong understanding of true commitment to their new markets and customer value transition, that do not understand what they believe in and how to express it, that cannot design their authentic talent into competencies, and that cannot outsmart their competitors with a unique offering will probably fail in the long run.

Strategy is about key directions that drive the positioning and actions of the organization. Strategy is about uniqueness and differentiating value to the customers who will pay for it. Usually driven top-down after input is received from all levels of the organization, strategy is about providing a guide to what makes the organization different with measurable, marketable, and manageable activities. A strategic plan should be elegant, understandable, and actionable. Strategy spans many years, sometimes 10 or more, while objectives run for two to three years measured yearly. But in transforming markets, strategy cannot lock itself into the usual incremental views where what is going to happen today will also happen tomorrow. Furthermore, you may have designed your organization in a form that assumes a state of affairs that may not exist after transformation. You must redesign. When markets transform, the standard compass based on a steady-state view cannot guide us through the storm. We must base our direction on our vision and our belief in what the customers will desire and on our view of who we are and what we stand for, more than the mechanics of today’s business model and how we are making money today.

Possibly the biggest predictor of failure may be having a current streak of success. The philosophy of keep doing what we are doing can sometimes work, but it will not work all the time because markets transform. The hints of transformation come many years earlier, but we tend not to notice because we think we will adapt as it comes, just as incremental change is our friend. When dramatic markets shifts come, companies die, people lose their jobs, and markets do not rebound. Competitiveness flattens, and anyone can make it big if they anticipate, prepare, and launch at the correct time with the right insight.

Why Another Book on Strategy?

This is not another book on strategy but a book about how to anticipate transformation in markets and build your business for advantage ahead of time. This book is about how to navigate markets that are transforming structurally, where the unknown unknowns affect an unpredicted shift in the market and where customers do not know what they will purchase because they are disoriented by market changes. Unknown unknowns are changes that we don’t even know exist before they arrive, and when they do, we begin to try to predict their behavior as known unknowns.

John Mackey, cofounder and co-CEO of Whole Foods, expressed it best:

I can prove that by just saying that nobody Googled anything 13 years ago because Google didn’t exist. Nobody had an iPod nine years ago, and nobody had an iPhone five years ago, and nobody was on Facebook seven years ago. The world changes.²

Strategy gurus have defined it in so many ways and have contributed so much to strategy development. Here are a few examples of great work that you might want to review:

Professor Michael Porter’s work on competitiveness and strategy³

The late C. K. Prahalad’s (and Gary Hamel’s) works on core competencies⁴

Professor Clayton Christensen and his contributions to disruptive innovation technologies⁵

Renee Mauborgne and W. Chan Kim with their work on Blue Ocean Strategy⁶

Professor Robert Kaplan and David Norton on Balanced Scorecard⁷

These are but a few of the significant authors of strategy who have helped us form a cohesive understanding of strategy formulation. They are rich with insights and practical approaches to creating, installing, and moving with strategic intent for your organization.

Strategic business transformation is the art and science of understanding which markets are transforming and putting together the framework to review strategy regularly. This process is done before a strategy formulation exercise. It frames the strategic guideposts. It has taken over 15 years to develop, as it has been formed through the learning experiences of several organizations. It is an approach that argues that organizations hold key ingredients to success that if not combined into a recipe, will not withstand market transformation. Organizations can use a lot of the learnings found in the great strategy texts, but what seems yet to be discovered is not which ingredients make up the meal but how to combine the ingredients to create a differentiating meal with a great aftertaste.

Furthermore, with the advent of social networking and the force that comes from the power now given for one to change many, strategic formulation and insight are no longer the territory only of the organization’s top leaders. Transforming organizations must master the art of bringing people into the play rather than just handing them a script. These shifts require a new form of strategy formulation and execution that aligns several core aspects of the business.

If Dinosaurs Had Strategy Tools, Would They Have Survived?

Imagine strategic sessions among dinosaurs. Would they have imagined a world without themselves? Could they have used current strategic tools to guide their realization that their world would no longer exist, that the mammals would survive, that small biologically insignificant animals would transform, and that there would be a new form of life that would someday use Facebook? Could they have been guided away from extinction if they had considered that the anchors of their survival would disappear?

Could they have survived using strategic tools available to us today if we advised them? Many organizations have their heads down, assuming that they will be fed for just working hard today. They define the market using their own view of their reality, assuming that the variables that drive their current markets now will drive their future markets. They assume that they are dominant and that the forces that keep them dominant will roam the earth for the next decade.

Tharman Shanmugaratnam, Deputy Prime Minister for the Republic of Singapore, commented at the East Asia World Eco­nomic Forum in 2007 that it is not the known unknowns but the unknown unknowns that we should be concerned about. Unknown unknowns was introduced to us in war-gaming decision analysis and project management to refer to events that we cannot predict simply because we did not know they existed before they arrived.

There are the known unknowns we anticipate, but it is the unknown unknowns that will hurt us more. Who predicted the tension in Greek markets, the banking crises, the mortgage crises and the subsequent drop in commercial real estate, or a fight for freedom in Egypt? Who uncovered that the mortgage crises would trigger such a great financial challenge or that the combination of elements created the unemployment in the United States?

Between 2007 and 2010, the following companies were well-regarded businesses, yet they failed:

American Home Mortgage

Bombay Company

CompUSA

Circuit City

Lehman Brothers

Levitz Furniture

Linens ’n Things

Mervyns

Sharper Image

Wachovia

Ziff-Davis

BearingPoint

Charter Communications

KB Toys

Monaco Coach Corporation

R. H. Donnelley

Silicon Graphics

Hollywood Video

The economy can have a significant impact on large and small businesses. The last few years have confirmed that no one is exempt from demise and that transformed markets are not forgiving to any company regardless of its size or market share. For every one of these companies (this is only a sample list), there are others that took market share from them. The false premise would be to chase after those companies and emulate them. However, it is not the company but the mind-set and behavior that we should try to understand.

Predicting Market Transformation

Can we predict which markets are likely to shift in 10 years? Markets are seldom transformed overnight. Just like a good meal on the stove, it takes time for all the ingredients to come together. The conditions for transformation come in and out of the market until they get into a force that triggers transformation. Then transformation accelerates and speeds through the actions and reactions of the market. At this point, markets are in turmoil and predictions become even worse off than before. With multiple variables, it becomes very challenging to formulate the right strategy if you are in the middle of it all. There is so much noise in the system that you cannot formulate the cause and effect of your strategic actions. Just as you cannot formulate strategy while running from a tornado, you cannot predict where it will land. But you can understand the conditions that might create a tornado and plan your strategy around the notion and remain flexible. Meanwhile, some organizations that have been preparing for a transformed market will instigate the transformation or build a timely and prepared response.

80–20 Reversals

Businesses mastered the art and science of predicting their future using advanced models (both financial and customer) because 80 percent of their future was cyclic. What goes up must come down, while what comes down will go up. Only 20 percent of the market moves were structural, and hence a sudden shift of the market would not likely impact a business’ plan. But now, when the unknown unknowns are threatening every variable we have counted on, 80 percent of the variables that shift are structural while 20 percent are predictable (see Exhibit 1.1). We cannot use the strategic data used in the past to find our true north. Customers may even tell you to stay where you are because they cannot see change coming in their future either (e.g., asking customers whether they would give up their bank teller for an ATM, and they refused to agree to it). Transforming markets have forgotten what got them there and are reforming to the future. We must use new tools and a new approach to understanding the strategic position that we must take by working at a higher altitude in strategy instead of using brute force planning, that is, checking with the markets, figuring the trends, building to customer expectation, and delivering well. Strategic business transformation is about capitalizing upon new principles.

Exhibit 1.1 The Nature of Change Is Changing

Anticipating Market Transformation

Four key transformation markers are valuable to watch in any market. These markers reveal market vibrations, and at some point the sheer kinetic force of these ingredients tends to drive market shifts that may not return the market to its original dimensions.

Furthermore, the markers are not all needed in transformation, but they may fire in sequence or together. The four markers are:

1. Is there a trigger to market rethinking value? Triggers are the forces that make stakeholders rethink the possibilities of change. Skyrocketing prices drive people to consider alternatives. Deregulation of the markets creates new markets. Increased scrutiny from government or other entities can also start a new force to transformation. We have experienced the gas crises, the financial crises, and the deregulation of the phone companies, and others will come.

2. Consumers are unaware of the real price and value. In markets like health care and education, the general public is somewhat unaware of the relationship between price and value. The prices keep going up, and customers seem to be getting less value for what they are paying. Similarly, when prices are subsidized by others or by governments, consumers begin to feel entitled to what they receive. Then value becomes even more distorted. In the education markets, the total cost of education loans has finally exceeded credit card debt in the United States.⁸ As of June 2010, Americans owed $826.5 billion in revolving credit while the total for outstanding student loans was $829.785 billion. Currently, the U.S. economic engine is challenged when consumers do not understand value and price equations (i.e., for everything of value there is a corresponding market price). The concept that there is no free lunch is still lost in some markets. When prices are subsidized and opaque to the customers, the risk of a revolt to market transformation is high.

3. Does the market have intermediaries between seller and purchaser? If this is the case, the value chain can get misunderstood, somewhat misinterpreted, and ripe for optimization of flow and costs. It happened when Walmart created a new way to shop and manage the supply chain. Walmart changed the way manufacturers, brokers, retailers, and wholesalers performed work. It changed the entire business model and activities in the food industry. Knowing what it did well and knowing what its competitors did not know about the consumer brought Walmart to victory with a higher percent margin in the same businesses in which its competitors enjoyed less in margin. The food industry had intermediaries ripe for the picking.

The airline industry has gone through similar transformation. Did you expect this change brought about by the Web? If you had asked focus groups of buyers, they would have told you they would never give up on agents because agents helped them deal with the airlines. Banks introduced ATMs despite similar responses from consumers, yet now we like ATMs for convenience and service. When intermediaries try to control access or manage the customer or the seller, the market is ripe for transformative opportunity. What happens when your customers decide that they can take less value for much less price, and you cannot get there for them? Your market may be shifting.

Consider the Honda Civic, which entered the U.S. market in 1972 with Americans laughing at the offering, as big was best in those days. Since Hondas were vulnerable to salt and rust, recalls were extensive. Yet through the years Honda kept developing and improving its cars. When the oil crises brought attention to the more economically attractive cars, Honda stood tall and grabbed share. Value was migrating not from big to small but from big to economical.

Hyundai was positioned for years as a very-low-option offering for many consumers. Slowly but surely, this South Korean car manufacturer is raising its profile in the midrange and high-end markets by appealing to the rational price-conscious (and not status-conscious) purchaser. Hyundai introduced its first car, the Excel, for $5,000 in 1986, when the market was wide open. With steady improvement and sensitivity to where it did not excel, Hyundai is challenging the high-end enthusiasts. Hyundai introduced a 10-year, 100,000-mile warranty to confirm its quality. Since it understood that some buyers would not buy cars because they were afraid of losing their jobs, Hyundai said that it would accept returned vehicles if customers lost their jobs. This presented a new value proposition to the audience: a manufacturer that cared. Approximately 100 cars were returned.⁹ Hyundai was initially about being inexpensive, but is quickly moving to being about luxury at a lower price tag. What if it also attacks quality and service? What will its rivals do? What if less expensive and not outdoing the neighbors becomes a virtue, and not showing your wealth or success in a down economy prevails?

4. Are the leaders in the industry perceived to be enjoying too much success while clients are suffering? If so, transformation, or at least disruption, is approaching. In some cases, the execu­tives may not be enjoying themselves, but it may be perceived this way. Some markets, like entertainment and sports, do not suffer from this predicament.

If lower-cost, highly efficient disruptors are roaming around, they prepare the market for transformation by introducing rapidly evolving disruptive solutions. Priceline.com and Expedia.com transformed the booking space of the airline industry, while online brokerage firms like Charles Schwab brought new personality to discount brokerages. Amazon.com transformed the world of bookstores, and iTunes changed the music world on the shoulders of Napster, which pioneered the approach. Is industry data obese but knowledge starved while the customers and buyers want wisdom?

Exhibit 1.2 illustrates some of the industries that fall into this assessment.

Exhibit 1.2 Industries in Transformation

During World War II, British forces in Singapore focused all their defenses and artillery toward the sea to the south to guard against attacks from the Japanese forces. Believing that their enemy would attack from the South China Sea, the British were imbalanced in their strategy. Singapore is connected to the Malayan peninsula to the north via a small, three-quarter-of-a-mile causeway. The Japanese forces, after careful consideration, walked into Singapore via this causeway to capture Singapore.

Many times, strategy and the associated tactics depend on the organizational worldview and assumptions. If the view of the business does not adjust, morph, or transform, the organizations